Capital flow waves to and from Switzerland before and after the financial crisis - Pinar Yeşin
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Capital flow waves to and from Switzerland before and after the financial crisis Pinar Yeşin SNB Working Papers 1/2015
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Capital flow waves to and from Switzerland
before and after the financial crisis∗
PINAR YEŞIN∗∗
Abstract:
This paper first shows that capital inflows to and outflows from financial centres were
disproportionately affected by the global financial crisis. Switzerland was no exception. The
paper then identifies waves of capital flows to and from Switzerland from 2000:Q1 to
2014:Q2 by using a simple statistical method. The analysis shows that private capital inflows
to and outflows from Switzerland have become exceptionally muted and less volatile since the
crisis. Further, strong and long-lasting ‘home bias’ behaviour can be observed for both Swiss
and foreign investors. By contrast, net private capital flows have shown significantly higher
volatility since the financial crisis, frequently registering extreme movements driven by
extreme movements in bank lending flows. These findings suggest that the financial crisis
generated a breaking point for capital flows to and from Switzerland.
JEL Classification: F21, F31, F32
Keywords: private capital flows, inflows, outflows, surges, stops, retrenchment, flight
∗
I thank two anonymous referees, Adrien Alvero, Katrin Assenmacher, Irineu de Carvalho Filho, Andreas
Fischer, Christian Grisse, seminar participants at the Swiss National Bank, and conference participants at the
2013 Conference of the Swiss Society of Economics and Statistics in Neuchatel and at the 2014 INFINITI
conference on International Finance in Prato for their helpful comments and discussions. I also thank Adrien
Alvero, Elisabeth Beusch, Elodie Moreau, and Laurence Wicht, who provided excellent research assistance at
various stages of this project. Any remaining errors are my own. The views expressed in this paper are those of
the author and do not represent those of the Swiss National Bank.
∗∗
International Trade and Capital Flows Unit, Swiss National Bank, Börsenstrasse 15, P.O. Box, CH-8022
Zürich, Switzerland, pinar.yesin@snb.ch.1. Introduction
The global financial crisis of 2007-2008 led to massive swings in international capital flows.
As Figure 1 shows, the sum of gross capital outflows from 172 countries declined from
almost 21 percent of world GDP in 2007 to a mere 2 percent of world GDP in 2008. While
swings in capital flows during recessions and crises had previously occurred, their sheer
volatility during the global financial crisis was unprecedented (MILESI-FERRETTI and TILLE,
2011). Further, the upward swing in 2010 reversed again in 2011, and several years after the
crisis, international capital flows remain well below their pre-crisis levels. By contrast, several
countries experienced capital inflow surges owing to their high growth prospects and interest
rate differentials after the financial crisis (AHMED and ZLATE, 2014).
Figure 1: International Capital Flows (% of World GDP)
Sources: IMF BOPS, WDI, and author’s calculations.
Note: International capital flows are defined as the sum of gross capital outflows from 172 countries in the
International Monetary Fund’s Balance of Payments Statistics (IMF BOPS) database. The IMF has two different
data series for balance of payments statistics based on two different accounting standards: the formerly used
BPM5 and the newly introduced BPM6 accounting standards. The BPM5 data extend only until 2008, though
the author has data up to 2011 from an earlier vintage of the IMF database, which is no longer publicly available.
The BPM6 data begin in 2005.
Monitoring trends in capital flows has always been essential from a policymaker’s
perspective. On the one hand, international capital flows can foster growth and risk sharing
through financial integration. On the other hand, they can exacerbate certain vulnerabilities,
such as amplified business cycles, financial and macroeconomic instability, and banking,
2sovereign, or currency crises. Indeed, previous literature shows that large swings in
international capital flows can have considerable effects on various macroeconomic and
financial indicators, such as inflation, asset prices, credit growth, and output (CALVO, 1998;
REINHART and REINHART, 2008; CARDARELLI, ELEKDAG, and KOSE, 2010; FURCERI,
GUICHARD, and RUSTICELLI, 2012; TILLMANN, 2013). This finding holds for both advanced
and emerging market economies. Accordingly, the massive swings in capital flows in recent
years have created extraordinary challenges for policymakers across the globe.
Against this backdrop, this paper aims to document the behavior of international capital flows
before and after the global financial crisis with a special focus on Switzerland, a financial
center with a small open economy. In particular, the paper documents the massive swings in
international capital flows during the financial crisis across selected (groups of) countries and
their diverse rebound experiences. The paper then analyzes quarterly data on capital flows to
and from Switzerland between 2000:Q1 and 2014:Q2 and identifies waves of capital flows by
using a simple statistical method. Through this analysis, periods of extreme capital flow
movements—surges, stops, retrenchment, and flight—are identified.
This paper makes two interesting contributions to the existing literature. First, it shows that
because of the financial crisis, strong and long-lasting ‘home bias’ behavior is observed in
many countries across the globe. However, the capital flows of financial centers were
disproportionately affected by the financial crisis relative to those of other countries across the
globe. Switzerland was no exception. Indeed, the paper shows that capital flows to and from
Switzerland have become exceptionally muted and less volatile. Thus, the paper demonstrates
that the retrenchment of capital flows across countries with significant international financial
integration during the financial crisis (see, e.g., MILESI-FERRETTI and TILLE, 2011) might
have become the new norm after the crisis. Furthermore, net capital flows to and from
Switzerland exhibit significantly higher volatility since the global financial crisis, suggesting
a decoupling of capital inflows and outflows. This finding contrasts with the long-run trends
presented in previous literature, such as BRONER et al. (2013) and BLUEDORN et al. (2013). As
BRONER et al. (2013) show, capital inflows to and capital outflows from advanced economies
have historically been positively correlated, resulting in small and stable net flows because of
their opposing effects. As presented in this paper, the recent experience of Switzerland
indicates that this positive correlation has decreased notably since the global financial crisis
causing volatile net flows for Switzerland. BLUEDORN et al. (2013), by contrast, argue that
capital flows across all economy groups historically tend to be fickle and that no differences
exist between advanced and emerging market economies. The recent experience of financial
centers presented in this paper provides a counterexample to this generalization. In fact, the
paper shows that capital inflows to and outflows from financial centers registered a
disproportionately large drop during the financial crisis and exhibited no recovery afterward.
The second contribution of this paper to the literature concerns the identification of capital
flow waves for Switzerland. Separate analyses are conducted for capital flows initiated by
foreigners and those initiated by domestic agents. Therefore, periods of surges and stops of
3capital inflows to Switzerland and periods of flight and retrenchment of capital outflows from
Switzerland are identified separately. In so doing, this paper follows a recent but growing
strand of literature on capital flows that has shifted its focus from net to gross capital flows,
such as KRAAY et al. (2005), LANE and MILESI-FERRETTI (2007), LANE (2013), BLUEDORN et
al. (2013), and BRONER et al. (2013). Earlier literature on capital flows focused extensively on
net capital flows and did not examine the type of investor underlying a capital flow wave. In
fact, these studies implicitly assumed that foreign investors were the main drivers of extreme
capital movements. However, this assumption is not necessarily accurate, as net capital flows
are determined by the joint behavior of domestic and foreign investors. Furthermore, domestic
and foreign agents are subject to different domestic and global conditions and considerations,
and they may behave completely differently when they are faced with the same domestic
and/or global shocks and policies. These behavioral differences between domestic and foreign
agents may arise from asymmetric exposure to sovereign risk, home bias, more accurate
information on the domestic economy, different hedging needs, better access to technology,
among others. Thus, empirical analyses should acknowledge the individual behavior of
domestic and foreign agents and should distinguish between capital in- and outflows. In
addition, policymakers should identify whether capital flow waves are driven by domestic or
foreign investors or a combination of both so that appropriate policy tools can be employed to
maintain macroeconomic and financial stability when necessary.
Furthermore, the paper advances this line of research by analyzing the major (sub)components
of capital in- and out-flows of extreme movements. There are two major benefits to studying
(sub)components of capital flows for extreme movements. First, whenever an extreme
movement occurs in gross capital flows, the type of investment flows underlying this
movement can be detected. Second, one can unveil possible synchronization or
desynchronization of capital flow waves in various investment types. In particular, the
components/subcomponents of capital flows to and from Switzerland that are analyzed in this
paper include private capital 1, gross capital, direct investment, equity capital, reinvested
earnings, debt instruments, portfolio investment, debt securities, equity securities, other
investment, bank lending, other sectors lending, reserve assets, foreign currency investment,
and derivatives.
The statistical analysis reveals that private capital inflows registered several surges and stops
before and during the financial crisis. However, since 2008:Q2, only one period of surge and
one period of stop have occurred. Similarly, private capital outflows from Switzerland
registered several flight and retrenchment periods before and during the financial crisis. Yet,
again, only one flight period has occurred since 2008:Q2. By contrast, net private capital
flows show frequent abnormal values during the whole sample period.
Furthermore, there is a high degree of synchronization of capital flow waves in different
(sub)components of capital flows before and during the financial crisis. However, extreme
1
Gross capital flows to/from the private sector, excluding the central bank and the public sector.
4movements of private capital flows are largely driven by extreme movements of bank lending
flows since they are coincident with each other to a large extent during the sample period. In
other words, capital flow waves in bank lending are driving the extreme movements of private
capital flows in general. Extreme movements in other (sub)components of capital flows
remain relatively small in gross capital flows to and from Switzerland.
The analysis also shows that some of the notable events that increased the uncertainty and
volatility of global financial markets were coincident with capital flow waves to and from
Switzerland. In particular, two abnormally low observations of net private capital flows were
coincident with the euro area sovereign debt crisis in 2010:Q2 and the extended bailout of
Greece in conjunction with the US debt-ceiling crisis in 2011:Q3. By contrast, the collapse of
Lehman Brothers in 2008:Q3 and the speech by Ben Bernanke in 2013:Q2 on tapering were
not coincident with extreme movements of net capital flows.
This paper is organized as follows. Subsection 2.1 describes the evolution of international
capital flows before and after the financial crisis, and subsection 2.2 describes the evolution of
gross capital flows to and from Switzerland. Subsection 3.1 then describes the statistical
method that is used to identify unusual behavior of capital flows, and subsection 3.2 presents
the findings. Section 4 concludes the paper.
2. Capital Flows Before and After the Financial Crisis
2.1. International Capital Flows
This subsection describes the evolution of international capital flows before and after the
financial crisis. It aims to provide a context for the Swiss experience, which is discussed in
the next subsection. Data for international capital flows are taken from the International
Monetary Fund (IMF) Balance of Payments Statistics (BOPS) database and are based on the
newly introduced BPM6 accounting standard. 2 The annual data cover the period from 2005 to
2013. Capital flows data are normalized by nominal world GDP retrieved from the World
Bank World Development Indicators (WDI) database to illustrate their macroeconomic
relevance.
Table 1 summarizes the massive swings in international capital flows over time across
selected (groups of) countries as a percentage of world GDP. It consists of three panels: the
top panel presents gross capital outflows; the middle panel presents gross capital inflows, and
the bottom panel presents net capital flows (i.e., the difference between gross capital outflows
and gross capital inflows).
2
The IMF switched from the BPM5 to the BPM6 accounting standard in 2012. International balance of
payments data based on the BPM6 accounting standard are not available prior to 2005, and international data
based on the BPM5 standard are available only until 2008.
5Table 1: Capital Flows across Countries (% of World GDP)
GROSS CAPITAL OUTFLOWS
2005 2006 2007 2008 2009 2010 2011 2012 2013
Financial centers++ 5.5 4.9 7.3 -1.8 -0.3 2.0 1.4 0.6 0.5
European periphery* 1.9 1.9 1.7 0.4 0.1 -0.1 0.0 0.1 0.0
Advanced countries+ 1.7 1.9 1.7 0.4 0.5 0.7 0.3 0.1 0.0
USA 1.2 2.7 2.8 -0.5 0.2 1.5 0.7 0.2 0.9
Germany 1.1 1.2 1.6 0.6 0.1 0.9 0.5 0.7 0.1
Oil exporters** 0.9 1.2 1.3 1.2 0.1 0.6 0.9 0.9 0.7
China 0.7 0.9 1.1 1.0 0.8 1.1 0.9 0.6 1.0
Japan 0.3 0.2 0.5 -0.1 -0.5 0.2 0.1 0.2 0.1
Rest of the world*** 1.5 1.8 2.4 0.9 0.6 1.1 0.9 0.6 0.7
Total 14.9 16.8 20.5 2.0 1.6 7.8 5.7 4.0 3.9
GROSS CAPITAL INFLOWS
2005 2006 2007 2008 2009 2010 2011 2012 2013
Financial centers++ 5.3 4.7 7.1 -1.8 -0.4 1.7 1.2 0.5 0.3
USA 2.7 4.2 3.9 0.7 0.5 2.1 1.4 0.8 1.4
European periphery* 2.2 2.3 2.1 0.8 0.4 0.3 0.3 0.1 -0.2
Advanced countries+ 1.7 1.9 1.8 0.6 0.7 0.8 0.5 0.2 0.0
Germany 0.8 0.8 1.1 0.2 -0.2 0.6 0.2 0.3 -0.4
China 0.4 0.4 0.5 0.3 0.4 0.8 0.8 0.4 0.8
Oil exporters** 0.3 0.4 0.7 0.4 0.0 0.3 0.2 0.3 0.2
Japan 0.0 -0.1 0.1 -0.4 -0.8 -0.2 -0.1 0.1 0.1
Rest of the world*** 1.5 1.8 2.7 1.4 0.8 1.4 1.2 1.2 1.1
Total 14.9 16.4 20.1 2.2 1.4 7.7 5.6 3.9 3.5
NET CAPITAL FLOWS
2005 2006 2007 2008 2009 2010 2011 2012 2013
Oil exporters** 0.7 0.8 0.5 0.7 0.1 0.3 0.6 0.6 0.4
China 0.3 0.5 0.7 0.7 0.3 0.3 0.2 0.2 0.1
Japan 0.3 0.3 0.4 0.3 0.3 0.4 0.2 0.1 0.0
Germany 0.3 0.4 0.5 0.4 0.3 0.2 0.3 0.4 0.4
Financial centers++ 0.2 0.3 0.2 0.0 0.1 0.3 0.2 0.2 0.2
Advanced countries+ 0.0 -0.1 0.0 -0.2 -0.2 -0.1 -0.2 -0.1 -0.1
European periphery* -0.3 -0.4 -0.4 -0.5 -0.3 -0.4 -0.3 0.0 0.1
USA -1.5 -1.5 -1.1 -1.2 -0.3 -0.7 -0.7 -0.6 -0.5
Rest of the world*** 0.0 0.0 -0.3 -0.6 -0.1 -0.3 -0.3 -0.5 -0.4
Total 0.0 0.3 0.5 -0.2 0.2 0.1 0.1 0.1 0.4
Source: IMF BOPS (BPM6), WDI, and author’s calculations.
Note: + Australia, Canada, France, and Korea.
++ Belgium, Hong Kong, Luxembourg, Netherlands, Singapore, Switzerland, and the United Kingdom.
* Greece, Ireland, Italy, Spain, and Portugal.
** Algeria, Angola, Ecuador, Iraq, Kuwait, Libya, Nigeria, Norway, Qatar, Russia, Saudi Arabia, and
Venezuela.
*** Rest of the world encompasses the remaining 140 countries.
6First, the top panel of Table 1 describes gross capital outflows from selected (groups of)
countries. 3 Positive values of capital outflows from a country indicate an increase in the
respective country’s foreign assets. Negative values, by contrast, indicate repatriation of an
existing foreign investment back to the country. The top panel shows that before the financial
crisis gross, capital outflows from financial centers, i.e., economies that serve as hubs for
international financial flows, were substantial. These financial centers are Belgium, Hong
Kong, Luxembourg, Netherlands, Singapore, Switzerland, and the United Kingdom. 4 Just
prior to the financial crisis in 2007, capital outflows from financial centers were 7.3 percent of
world GDP. Thus, financial centers accounted for almost 36 percent of total capital outflows. 5
This result is striking in itself because only seven countries, six of which are small economies,
were driving such a substantial volume of international capital outflows before the onset of
the crisis. 6 During the financial crisis of 2008 and 2009, capital outflows decreased drastically
from all (groups of) countries or even reversed. There was a rebound of capital outflows from
some countries afterwards, such as the USA and oil exporting countries. However, capital
outflows from many advanced economies, particularly financial centers, continued to remain
significantly lower than their pre-crisis levels. In fact, capital outflows from financial centers
were still low at 0.5 percent of world GDP in 2013. Thus, financial centers accounted for less
than 13 percent of total capital flows in 2013. Overall, the top panel of Table 1 reveals that
capital flows from all countries were hit by the global financial crisis but that their recovery
experiences differed considerably afterward. This finding contrasts with the findings of
BLUEDORN et al. (2013), who argue that capital flows across all economy groups historically
tend to be fickle and that the behavior of flows do not significantly differ across economy
groups (advanced or emerging), despite the differences in policies across economies and over
time.
The middle panel of Table 1 presents gross capital inflows to selected (groups of) countries.
Positive values of gross capital inflows indicate an increase of the foreign liabilities of the
listed countries, whereas negative values indicate repatriation. The middle panel shows that
capital inflows to all countries decreased significantly or even reversed during the global
financial crisis of 2008 and 2009. As is the case for capital outflows, the rebound experiences
of capital inflows differed considerably across countries. In particular, capital inflows to
financial centers show a disproportionately sharp drop and no significant recovery since the
3
Note that the sum of gross outflows from these (groups of) countries corresponds to the international capital
flows series shown in Figure 1.
4
Notably, the definition of financial centers is tenuous. Here, I follow an extended definition of the IMF and
classify six small economies with large financial markets as financial centers. In addition, I define the UK as a
financial center because it has a substantial financial sector relative to its GDP and because it is regarded to be
a hub for international financial flows by the World Bank. A vast majority of these countries’ capital flows
were in the form of cross-border banking flows before the onset of the financial crisis.
5
The UK significantly contributes to this number because of its sheer size, but it is not the main driver of this
phenomenon.
6
The total GDP of financial centers was 8.8 percent of world GDP in 2007 and 6.8 percent of world GDP in
2012. The GDP of the UK was 5.1 percent of world GDP in 2007 and 3.4 percent of world GDP in 2012.
7crisis. 7 The middle panel of Table 1 shows that just before the financial crisis in 2007, capital
inflows to financial centers were 7.1 percent of world GDP, accounting for 35 percent of total
capital inflows. In 2013, however, they were quite low, at 0.3 percent of world GDP,
accounting for less than 9 percent of total capital inflows. 8
The bottom panel of Table 1 lists net capital flows to or from selected (groups of) countries.
Net capital flows are calculated as the difference between gross capital outflows and gross
capital inflows. Positive values indicate net capital outflows from a country, resulting in a
current account surplus, whereas negative values indicate net capital inflows to a country,
resulting in a current account deficit. The bottom panel shows that net capital flows around
2009 also exhibit a break in the trend for some of the selected countries, such as China, the
USA, and the European periphery. Since 2009, net capital flows have decreased, in absolute
value, for most of the selected countries. However, these breaks are much smaller than those
observed for gross capital flows shown in the other panels of Table 1. This observation
supports the view that gross capital flows must be studied separately to understand the
different behavior between domestic and foreign investors.
In summary, Table 1 shows that investors exhibited ‘home bias’ behavior after the financial
crisis, i.e., levels of new foreign investment by investors after the financial crisis tended to be
lower than pre-crisis levels. In particular, capital flows to and from financial centers, as well
as some advanced countries and countries in the European periphery, seem to have been
disproportionately affected by the financial crisis relative to those of other countries.
2.2. Capital Flows to and from Switzerland
In this subsection, the evolution of capital flows to and from Switzerland is presented. Data
for Switzerland are taken from the Swiss National Bank’s (SNB) balance of payments
statistics and are based on the newly introduced BPM6 accounting standard. 9 They are on a
quarterly basis and cover the period from 2000:Q1 to 2014:Q2.
In the following figures and tables, the sample period is divided into three sub-periods: the
pre-financial-crisis period, between 2000:Q1 and 2006:Q4; the financial crisis period,
between 2007:Q1 and 2009:Q2 (shaded in the figures); and the post-financial-crisis period,
7
Nevertheless, net capital flows to/from financial centers remained relatively stable before and after the crisis.
8
The discrepancies between total gross capital inflows and total gross capital outflows are due to errors and
omissions of individual countries’ balance of payments statistics.
9
In 2014, the Swiss balance of payments and international investment position data were aligned with the IMF's
Balance of Payments and International Investment Position Manual, Sixth Edition, BPM6
(http://www.imf.org/external/pubs/ft/bop/2007/bopman6.htm). This version of the paper uses Swiss balance of
payments data based on this new accounting standard. Quarterly data based on the BPM6 accounting standard
are available from 2000:Q1 onward. An earlier version of this paper used data based on the previous BPM5
accounting standard. The general findings of the statistical analysis are robust to the choice of accounting
standard. More information on the change in accounting standards in Switzerland can be found at
http://www.snb.ch/en/iabout/stat/bpm6/id/stat_bpm6_uebersicht.
8between 2009:Q3 and 2014:Q2. The start and end quarters of the financial crisis sub-periods
are chosen based on the crisis timeline published by the Federal Reserve Bank of St. Louis. 10
These dates also reflect the changing behavior of capital flows to and from Switzerland with
the onset of the financial crisis.
In addition, notable events that affected financial markets are indicated with vertical lines in
the following figures to provide some context. These notable events significantly increased
the uncertainty and volatility of global financial markets, as measured, for example, by
sudden spikes in the Chicago Board Options Exchange’s volatility index, VIX. These events
were considered to trigger international capital flows with possible repercussions on financial
markets. The notable events considered in this paper are the collapse of Lehman Brothers in
2008:Q3 [Lehman], the euro area sovereign debt crisis in 2010:Q2 [EA Crisis I], the extended
bailout of Greece in conjunction with the US debt-ceiling crisis in 2011:Q3 [EA Crisis II],
and the speech by Ben Bernanke on tapering in 2013:Q2 [Bernanke Tapering].
Furthermore, private capital flows to and from Switzerland rather than gross capital flows are
depicted in this section. Gross capital flows consist of both private capital flows and public
capital flows. Public capital flows are defined as flows that go to or emanate from the public
sector, while private capital flows are defined as the residual. In particular, reserve
accumulations by central banks are included in public capital flows. During normal times, and
with a flexible exchange rate regime, public capital flows constitute a negligibly small part of
gross capital flows. However, since 2009:Q2, public capital flows have been sizeable for
Switzerland because of exchange rate interventions by the SNB, which have resulted in
reserve accumulations. Therefore, studying gross capital flows would provide a biased view
of (domestic) investor behavior for Switzerland. Therefore, this section focuses on private
capital flows only. Corresponding figures depicting gross capital flows are included in
Appendix A for completeness of analysis.
Figure 2 depicts private capital inflows to Switzerland from abroad. Capital inflows are
defined as the change in foreign investment in Switzerland. Positive values indicate an
increase of foreign liabilities in Switzerland, whereas negative values indicate repatriation of
foreign investment in Switzerland back to countries abroad. A few observations from Figure 2
are notable. Before the financial crisis, quarterly private capital inflows were substantial and
volatile, fluctuating between -50 percent and 100 percent of quarterly GDP. During the crisis,
their volatility significantly increased. Since the financial crisis, however, private capital
inflows have become much smaller in magnitude and have exhibited much less volatility.
Interestingly, none of the notable events considered in this paper coincide with an unusual
movement in private capital inflows to Switzerland. In fact, during those quarters, inflows
were fairly low, at about zero percent of quarterly GDP.
10
http://timeline.stlouisfed.org/pdf/CrisisTimeline.pdf starts with events in February 2007 and ends with events
in July 2009.
9Figure 2: Private Capital Inflows to Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines indicate
notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3, the
bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction with the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2. Positive
values indicate an increase in foreign investment in Switzerland, whereas negative values indicate repatriation.
Figure 3 illustrates private capital outflows from Switzerland to other countries. Capital
outflows are defined as the change in Swiss investment abroad. Positive values indicate an
increase in Swiss investment abroad. Conversely, negative values indicate repatriation. A few
observations from Figure 3 are notable, similar to those for Figure 2. Before the financial
crisis, quarterly capital outflows from Switzerland were substantial and volatile, fluctuating
between -50 percent and 100 percent of quarterly GDP. During the crisis, their volatility
significantly increased. Since the financial crisis, however, private capital outflows have
become much smaller in magnitude and have exhibited much lower levels of volatility. Again,
none of the notable events that stirred global financial markets coincided with unusual
movements in private capital outflows from Switzerland.
On the other hand, the data for net private capital flows provide a completely different picture
in Figure 4. The difference between outflows and inflows yields net capital flows. Positive
values indicate net outflows from Switzerland, whereas negative values indicate net inflows to
Switzerland. Because Switzerland has been running a current account surplus for the last three
decades, it has had persistent net capital outflows, i.e., entities residing in Switzerland have
invested more abroad than entities residing abroad have invested in Switzerland. Between
2000:Q1 and 2006:Q4, net private capital flows fluctuated between 0 percent and 30 percent
of quarterly GDP. That is, although capital inflows and outflows were substantial and
exhibited high volatility before the crisis (Figures 2 and 3), net capital flows were relatively
smaller in magnitude and exhibited less volatility (Figure 4). However, with the onset of the
10crisis, both the magnitude and the volatility of net capital flows significantly increased,
indicating a decoupling of capital inflows and outflows such that they no longer canceled each
other out and the resulting net flows became volatile. Since 2009:Q1, net private capital flows
have been fluctuating between -50 percent and 25 percent of GDP. Moreover, the volatility of
net capital flows significantly increased when markets were stirred by some of the notable
events considered in this paper, especially during the euro area sovereign debt crises.
Figure 3: Private Capital Outflows from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines indicate
notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3, the
bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction with the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2. Positive
values indicate an increase in Swiss foreign investment abroad, whereas negative values indicate repatriation.
Thus, the historical positive correlation between inflows to and outflows from advanced
economies (BRONER et al., 2013) seems to have decreased with the financial crisis in the case
of Switzerland. Figure 5 illustrates exactly this point. The figure shows the correlation
coefficient between private capital inflows to and outflows from Switzerland using 12-
quarter-long windows. In the beginning of the sample period, the correlation coefficient is
very high close to one. Then around 2010 it starts declining sharply. In 2012:Q3, it turns
slightly negative and then moves around zero until the end of the sample period. 11
11
The correlation coefficient between gross capital in- and outflows declined also notably after the financial crisis, albeit not as sharply as in
the case of private capital flows. As of 2014:Q2, the coefficient was around 0.8.
11Figure 4: Net Private Capital Flows to and from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines indicate
notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3, the
bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2. Positive
values indicate net capital outflows from Switzerland, whereas negative values indicate net capital inflows to
Switzerland.
Figure 5: Correlation between Private Capital Inflows and Outflows for Switzerland
1
0.8
0.6
0.4
0.2
0
-0.2
Source: SNB and author’s calculations.
Note: The figure shows moving correlation coefficient between private capital inflows and outflows using 12-
quarter-long rolling windows.
12Based on these observations, I conjecture that the financial crisis generated a break in the
investment behavior of both domestic and foreign investors. In particular, the data show that
Swiss and international investors exhibit strong and long-lasting ‘home bias’ behavior after
the financial crisis, which is consistent with the international evidence presented in section 2.1
for financial centers.
Table 2: Summary Statistics of Private Capital Flows from and to Switzerland
(% of GDP)
Pre-crisis Crisis Post-crisis
Inflows 2000:Q1-2006:Q4 2007:Q1-2009:Q2 2009:Q3-2014:Q2
Min -51.5 -105.1 -35.4
Max 107.9 209.5 40.7
Average 20.4 16.7 5.5
Median 20.2 0.3 5.1
St Deviation 43.5 84.4 19.5
Outflows
Min -46.2 -94.5 -21.6
Max 130.0 224.3 34.4
Average 33.5 14.6 8.1
Median 31.1 0.9 9.7
St Deviation 44.3 91.3 17.1
Net flows
Min -2.4 -46.2 -50.0
Max 31.5 14.8 24.1
Average 13.1 -2.1 2.7
Median 13.8 6.0 10.1
St Deviation 7.6 21.2 22.9
Source: SNB and author’s calculations.
Note: T-tests: There is a statistically significant difference at the 5% level between the means of the pre- and
post-crisis periods for outflows and net flows.
SD-tests: There is a statistically significant difference at the 5% level between the standard deviations for the
pre- and post-crisis periods for inflows, outflows, and net flows.
These observations are also confirmed in Table 2, where various statistical properties of the
underlying capital flows data are listed. Again, the sample period is divided into three sub-
periods: the pre-crisis period, the crisis period, and the post-crisis period. As Table 2 shows,
the pre- and post-crisis sub-periods exhibit significantly different characteristics regarding the
average and variance of capital flows. Specifically, both inflows and outflows of private
capital have become significantly less volatile in the post-crisis period than in the pre-crisis
period. By contrast, net flows have become significantly more volatile after the financial crisis
than beforehand. Furthermore, both outflows and net flows have become significantly lower
in the post-crisis period than in the pre-crisis period.
133. Capital Flow Waves: Surges, Stops, Flight, and
Retrenchment
3.1. Methodology
This subsection explains the methodology that is used to identify capital flow waves. Waves
are defined as periods of extreme movements in capital flows relative to their behavior in the
recent past. The terminology for capital waves described herein is taken from FORBES and
WARNOCK (2012a) and is based on differentiating between capital flows initiated by foreign
investors and those initiated by domestic investors. In other words, extreme movements in
gross capital inflows and outflows are considered separately. This approach is found to yield
fundamentally different results from the previous literature, which has focused on net flows
only. 12 The findings in section 3.2 will be another case in point. Furthermore, as mentioned in
the introduction, analyzing gross flows is more suitable for policy discussion regarding
appropriate tools to alleviate the vulnerabilities of the domestic economy caused by swings in
capital flows.
Following FORBES and WARNOCK (2012a), four types of extreme movements in capital flows
are defined:
• A surge of gross capital inflows is a sharp increase in gross capital inflows.
• A stop of gross capital inflows is a sharp decrease in gross capital inflows.
• A flight is a sharp increase in gross capital outflows.
• A retrenchment is a sharp decrease in gross capital outflows.
In other words, foreign investors who initiate capital inflows are the drivers of surges and
stops, whereas domestic investors who initiate capital outflows are the drivers of flight and
retrenchment.
Previous literature has identified ‘sharp’ increases and decreases in capital flows by using
various statistical methods, which usually involve two steps. First, smoothed levels of capital
flows are calculated based on past values. Smoothed levels can be calculated, for example, by
using average values based on rolling windows or by using a Hodrick-Prescott (HP) filter.
Then, observations of capital flows that are significantly higher or lower than the smoothed
level in each period are identified as extreme movements. Usually, the thresholds are set equal
to trend plus/minus one standard deviation to identify extreme movements. 13
12
See FORBES and WARNOCK (2012a), BRONER et al. (2013), and POWELL and TAVELLA (2012) for a discussion
on gross versus net capital flows.
13
For example, CARDARELLI, ELEKDAG, and KOSE (2010) study the annual net capital inflows-to-GDP ratio by
using a backward-looking rolling HP filter to smooth the data. The rolling windows are five years long.
Observations that deviate from the trend by more than one historical standard deviation are identified as surges
as long as they are economically relevant (more than one percent of GDP). POWELL and TAVELLA (2012)
follow the method suggested by CARDARELLI, ELEKDAG, and KOSE (2010) and analyze quarterly data on
14In this paper, I use an HP filter with a recursive window to calculate the smoothed levels of
capital flows. A recursive window allows for all information up to each point in time to be
used to calculate the underlying trend of the data. Thus, the trend is smooth, but no historical
information is lost. Furthermore, I calculate the standard deviation of capital flows by using
rolling windows of 12 quarters. This window corresponds to the last three years, which is
sufficiently long enough to determine the recent volatility trends and is sufficiently short to
avoid having the crisis period overshadow the post-crisis period for too long. The normal
range of capital flows in each quarter is then defined as the current level of the HP trend
plus/minus 1.15 times the recent standard deviation. Following the previous literature, I do
not consider capital flows with an absolute value of less than one percent of the GDP to be
extreme movements. Using this methodology, I start by defining the ‘normal range’ first for
2001:Q1 based on information up to and including 2000:Q4.
For completeness of analysis, extreme movements of net capital flows are also identified in
this paper. Observations of net capital flows that are significantly higher or lower than the
normal range are classified as abnormally high or abnormally low values.
3.2. Findings: Capital Flow Waves to and from Switzerland
This subsection summarizes the findings regarding capital flow waves to and from
Switzerland based on the methodology described in the previous subsection.
Figure 6 illustrates private capital inflows to Switzerland, indicating surges and stops.
Between 2000:Q1 and 2006:Q4, four instances of capital surges (2004:Q1, 2005:Q2,
2005:Q3, and 2006:Q1) and one instance of a capital stop (2005:Q4) occurred. During the
financial crisis, private capital inflows surged in 2007:Q1 and stopped in 2008:Q2. After the
financial crisis, however, one instance of a capital surge occurred in 2011:Q3, and one
instance of a capital stop occurred in 2012:Q4. Thus, during the run-up to the financial crisis,
private capital inflows often registered surges, but since 2008:Q2, they have largely been
within the normal range. Among the notable events, only the EA Crisis II event in 2011:Q3
coincided with a surge in private capital inflows.
Figure 7 displays private capital outflows from Switzerland, indicating periods of flight and
retrenchment. Between 2000:Q1 and 2006:Q4, four instances of capital flight (2004:Q1,
2005:Q2, 2005:Q3, and 2006:Q1) and two instances of capital retrenchment (2005:Q4 and
2006:Q4) occurred. Then, during the financial crisis, capital outflows registered a flight in
2007:Q1 and a retrenchment in 2008:Q2. Since the crisis, however, private capital outflows
capital inflows-to-GDP ratios by using a HP filter and rolling windows. By contrast, FORBES and WARNOCK
(2012a) study quarterly nominal capital inflows and outflows data by calculating year-over-year changes and
then calculating historic averages for the last 5 years. Episodes when year-over-year changes fall above or
below the historic average by more than two standard deviations are identified as capital flow wave episodes as
long as they last at least two quarters. Some papers in the literature also consider cross-country averages and
use a sample criterion to identify surges in a given country; see, for example, GHOSH et al. (2014).
Furthermore, several papers impose the restriction that surges (or stops) last at least two quarters, such as
FORBES and WARNOCK (2012b).
15have shown only one extreme movement: a flight in 2013:Q3. Thus, during the run-up to the
financial crisis, private capital outflows frequently registered flights, but since 2008:Q2, they
have largely been within the normal range. None of the notable events coincided with a
retrenchment or flight of capital outflows. Only the Bernanke Tapering event preceded a
flight of private capital outflows from Switzerland in 2013:Q3.
For completeness of analysis and for purposes of comparison, extreme movements of net
private capital flows are displayed in Figure 8. Between 2000:Q1 and 2014:Q2, numerous
abnormal values of net private capital flows are observed. In particular, six instances of
abnormally high values of net private flows and nine instances of abnormally low values of
net private capital flows occurred. Interestingly, most of the abnormally high values occurred
before the financial crisis, whereas most of the abnormally low values occurred during or after
the financial crisis. Remarkably, two of the notable events, namely, the EA Crisis I and EA
Crisis II events, coincided with abnormally low values of net private flows. Furthermore,
immediately after the collapse of Lehman Brothers two abnormally low values of net private
capital flows were registered in 2008:Q4 and 2009:Q1.
Figure 6: Private Capital Inflows to Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The light-grey shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines
indicate notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3,
the bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2. Surges are
sharp increases in capital inflows, whereas stops are sharp decreases in inflows.
16Table 3 provides an overview of the extreme movements of capital flows identified in Figures
6 to 8. It has two main purposes. First, it shows any (de)synchronization of extreme
movements of gross capital inflows and outflows. Second, it visually displays whether
extreme movements in gross flows were responsible for the abnormal values of net flows.
Table 3 presents a number of notable characteristics of the crisis and post-crisis periods. First,
at the beginning of the crisis period, extreme movements in private capital inflows and
outflows were in opposite directions, counterbalancing each other to some extent. In
particular, when a surge of capital inflows occurred, a flight of capital outflows occurred
simultaneously, generally resulting in no abnormal values of net flows. After the crisis,
however, this synchronization and counterbalancing between inflows and outflows
disappeared. Second, during the crisis and post-crisis periods, frequent abnormal values of net
private flows were observed, but almost none of them coincided with any surges, stops,
flights, or retrenchments of capital inflows and outflows. The only exception is 2011:Q3,
when a surge of private capital inflows is the driver of the abnormally low value of net private
capital flows. Therefore, a greater congruence between the investment decisions of domestic
and foreign investors seems to be driving the abnormal values of net flows during the post-
crisis period.
Figure 7: Private Capital Outflows from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines indicate
notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3, the
bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2. A flight is a
sharp increase in capital inflows, whereas retrenchment is a sharp decrease in inflows.
17The next step is to analyze the major (sub)components of capital flows. In particular, the
following components and subcomponents are analyzed: direct investment, and its
subcomponents equity capital, reinvested earnings, and debt instrument flows; portfolio
investment, and its subcomponents debt securities and equity securities; other investment, and
its subcomponents bank lending and other sectors lending; reserve assets, and its
subcomponent foreign currency investment; and derivatives. Table B1 in Appendix B
provides the definitions for these (sub)components, whereas Figures B1 to B14 illustrate the
capital waves identified in the inflows, outflows, and net flows of each of these
(sub)components. Tables 4 and 5 then summarize the findings regarding the
(de)synchronization of these capital waves.
Figure 8: Net Private Capital Flows to and from Switzerland (% of GDP)
Source: SNB and author’s calculations.
Note: The shaded area corresponds to the crisis period from 2007:Q1 to 2009:Q2. Four vertical lines indicate
notable events during the sample period. These events are the collapse of Lehman Brothers in 2008:Q3, the
bailout of Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in
2011:Q3 in conjunction the US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2.
18Table 3: Capital Flow Waves
Private Inflows Private outflows Net private flows Notable Events
2000:Q1
2000:Q2
2000:Q3
2000:Q4
2001:Q1
2001:Q2 Abnorm. high
2001:Q3
2001:Q4
Pre-crisis period
2002:Q1 Abnorm. low
…
2004:Q1 Surge Flight
2004:Q2 Abnorm. high
2004:Q3
2004:Q4
2005:Q1
2005:Q2 Surge Flight Abnorm. high
2005:Q3 Surge Flight
2005:Q4 Stop Retrenchment Abnorm. high
2006:Q1 Surge Flight
2006:Q2
2006:Q3
2006:Q4 Retrenchment
2007:Q1 Surge Flight
2007:Q2 Abnorm. low
2007:Q3 Abnorm. low
Crisis period
2007:Q4
2008:Q1 Abnorm. low
2008:Q2 Stop Retrenchment
2008:Q3 Lehman Collapse
2008:Q4 Abnorm. low
2009:Q1 Abnorm. low
2009:Q2 Abnorm. high
2009:Q3
2009:Q4
2010:Q1
2010:Q2 Abnorm. low Euro area crisis I
2010:Q3 Abnorm. high
2010:Q4
2011:Q1
Post-crisis period
2011:Q2
2011:Q3 Surge Abnorm. low Euro area crisis II
2011:Q4
2012:Q1
2012:Q2 Abnorm. low
2012:Q3
2012:Q4 Stop
2013:Q1
2013:Q2 Bernanke tapering
2013:Q3 Flight
2013:Q4
2014:Q1
2014:Q2
Source: SNB and author’s calculations.
The highlighted dates correspond in this order to: the collapse of Lehman Brothers in 2008:Q3, the bailout of
Greece in 2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in 2011:Q3 along
with the US debt ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2.
19Table 4: Surges and Stops of Capital Inflows to Switzerland
Other
Gross Direct Equity Reinvested Debt Portfolio Equity Other Bank
Debt sec. sectors
capital invest. capital earnings instr. invest. sec. invest. lending
lending
2000:Q1
2000:Q2
2000:Q3
2000:Q4
2001:Q1 Stop Stop Stop Surge
2001:Q2 Stop
2001:Q3
2001:Q4
2002:Q1
2002:Q2
2002:Q3
Surge Surge
Pre-crisis period
2002:Q4
2003:Q1 Stop Stop Surge
2003:Q2
2003:Q3 Surge Surge Surge
2003:Q4 Surge Stop Surge
2004:Q1 Surge Surge Surge
2004:Q2 Surge
2004:Q3 Stop Stop Surge Stop Stop
2004:Q4 Surge Stop
2005:Q1 Stop Stop Surge
2005:Q2 Surge Surge Surge Surge Surge
2005:Q3 Surge Surge Surge Surge Surge
2005:Q4 Stop Stop Stop Stop Stop Stop
2006:Q1 Surge Surge Surge Stop Surge Surge
2006:Q2 Surge
2006:Q3 Surge
2006:Q4 Surge Surge Surge Surge Stop Stop Stop
2007:Q1 Surge Stop Surge Surge Surge
2007:Q2 Surge Stop Surge Stop Surge
2007:Q3 Stop Stop
Crisis period
2007:Q4 Stop Surge Surge Stop
2008:Q1 Stop Surge Surge Surge
2008:Q2 Stop Surge Stop Stop
2008:Q3 Stop Stop Stop Stop
2008:Q4 Surge Surge Stop
2009:Q1 Surge Surge
2009:Q2
2009:Q3
2009:Q4 Stop Stop Stop
2010:Q1 Stop Stop
2010:Q2 Surge Surge
2010:Q3 Surge Surge
2010:Q4 Surge
2011:Q1 Surge Stop
Post-crisis period
2011:Q2 Stop Surge
2011:Q3 Stop Stop Stop Surge Surge
2011:Q4 Stop Surge
2012:Q1 Surge Surge
2012:Q2 Surge Surge Stop
2012:Q3 Stop Stop
2012:Q4 Stop Stop Stop
2013:Q1 Stop Stop
2013:Q2 Stop Surge
2013:Q3 Surge
2013:Q4 Stop Stop
2014:Q1 Surge Surge
2014:Q2 Surge
Source: SNB and author’s calculations.
Note: The highlighted dates correspond to the collapse of Lehman Brothers in 2008:Q3, the bailout of Greece in
2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in 2011:Q3 in conjunction the
US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2.
20Table 5: Flight and Retrenchment of Capital Outflows from Switzerland
Other Foreign
Gross Direct Equity Reinvested Debt Portfolio Debt Equity Other Bank Reserve
sectors currency
capital invest. capital earnings instr. invest. sec. sec. invest. lending assets
lending invest.
2000:Q1
2000:Q2
2000:Q3
2000:Q4
2001:Q1 Retrench Retrench Retrench Flight Flight Flight Retrench Retrench
2001:Q2 Retrench Flight
2001:Q3
2001:Q4
2002:Q1 Retrench Retrench
2002:Q2 Retrench
2002:Q3
Flight
Pre-crisis period
2002:Q4
2003:Q1 Flight
2003:Q2 Flight
2003:Q3 Flight
2003:Q4 Flight
2004:Q1 Flight Flight Flight Flight Flight Flight Flight
2004:Q2 Flight Retrench Retrench
2004:Q3 Retrench Retrench Flight
2004:Q4 Retrench
2005:Q1 Flight Retrench Flight
2005:Q2 Flight Flight Flight Flight Flight Flight Retrench Retrench
2005:Q3 Flight Flight Flight Flight Flight Flight Flight Flight Flight
2005:Q4 Retrench Retrench Retrench
2006:Q1 Flight Flight Flight Flight Flight Flight Flight Flight
2006:Q2 Retrench Retrench Retrench Flight
2006:Q3 Flight Flight Retrench Retrench Retrench
2006:Q4 Retrench Retrench Flight Retrench Retrench Retrench Flight
2007:Q1 Flight Flight Retrench Flight Flight Flight
2007:Q2 Retrench Retrench Retrench Retrench Retrench Retrench Flight
2007:Q3 Retrench Retrench Retrench
Crisis period
2007:Q4 Retrench Retrench
2008:Q1 Retrench Retrench Flight
2008:Q2 Retrench Retrench Retrench Retrench Retrench
2008:Q3 Retrench Retrench Retrench
2008:Q4 Retrench Flight Retrench Retrench Retrench
2009:Q1 Retrench Flight Retrench Flight Flight
2009:Q2 Flight Flight Flight
2009:Q3 Flight Retrench Retrench
2009:Q4
2010:Q1 Flight Flight
2010:Q2 Flight Flight Flight
2010:Q3 Flight Flight Retrench Retrench Retrench
2010:Q4 Flight Flight
2011:Q1
Post-crisis period
2011:Q2
2011:Q3 Retrench Retrench Flight Flight
2011:Q4 Flight Retrench Retrench Retrench
2012:Q1
2012:Q2 Flight Retrench Flight Flight
2012:Q3
2012:Q4 Flight Retrench Flight
2013:Q1 Retrench
2013:Q2
2013:Q3
2013:Q4 Flight
2014:Q1 Flight
2014:Q2 Flight Flight Flight
Source: SNB (BPM6) and author’s calculations.
Note: The highlighted dates correspond to the collapse of Lehman Brothers in 2008:Q3, the bailout of Greece in
2010:Q2 amid the euro area sovereign debt crisis, the extended bailout of Greece in 2011:Q3 in conjunction the
US debt-ceiling crisis, and Bernanke’s speech on tapering in 2013:Q2.
21Table 4 lists the surges and stops of major components of capital inflows to Switzerland
between 2000:Q1 and 2014:Q2. First, both surges and stops occurred in all of the components
in at least one quarter during the sample period. Frequently, stops were immediately followed
by surges in the following quarter, or vice versa. For example, the surge in bank lending
inflows in 2007:Q1 was followed by a stop in 2007:Q2. However, there are also periods in
which a stretch of stops or surges can be identified in the data. For example, inflows of debt
securities surged starting in 2010:Q2 for three consecutive quarters and then stopped in
2011:Q3 for two consecutive quarters. By contrast, equity capital flow waves were generally
short lived. Furthermore, different components of capital inflows often exhibited extreme
movements in the opposite direction. For example, in 2011:Q3, while debt instruments (a
subcomponent of direct investment) and debt securities (a subcomponent of portfolio
investment) experienced stops in capital inflows, bank lending (a subcomponent of other
investment) registered a surge of capital inflows. These results may reflect substitution
behavior between different types of investment by foreign investors. Interestingly, surges (or
stops) in gross capital inflows coincide with surges (or stops) in bank lending inflows to a
large extent: Gross capital inflows registered extreme movements in ten quarters during the
sample period, where eight cases were coincident with an extreme movement in bank lending
flows. Capital flow waves in the remaining (sub)components are not associated with capital
flow waves in gross capital inflows, likely because these components constitute a relatively
small share of gross capital flows.
Table 5, by contrast, records the periods of flight and retrenchment in major components of
capital outflows from Switzerland between 2000:Q1 and 2014:Q2. As with the components of
capital inflows, extreme movements in both directions occurred in almost all components of
capital outflows during the sample period. Frequently, a period of capital flight was followed
by a period of retrenchment, or vice versa. For example, a flight of capital outflow in bank
lending in 2007:Q1 was followed by a retrenchment in 2007:Q2. Further, sometimes several
types of capital flows registered a flight or retrenchment simultaneously. For example, in
2004:Q1, six (sub)components of capital outflows of 12 (sub)components considered
registered a flight. At other times, different types of capital flows exhibited waves in opposite
directions. For example, in 2006:Q3, portfolio investment registered a retrenchment, whereas
direct investment registered a flight. As with capital inflows, capital flow waves in gross
capital outflows coincide with capital flow waves in bank lending outflows to a large extent:
Gross capital outflows registered an extreme movement in eleven quarters during the sample
period, where eight cases were coincident with an extreme movement in bank lending flows.
Waves in the remaining (sub)components of capital outflows cannot be matched with waves
in gross capital outflows.
In summary, many components of capital flows displayed waves in inflows and outflows
during the crisis period. Since the financial crisis, capital flows have continued to exhibit
waves in some components, such as equity capital and debt securities; however, these waves
are not coincident with capital flow waves in gross flows. Waves in bank lending flows, by
contrast, coincide with waves in gross flows. Furthermore, although capital flow waves are
22sometimes synchronized in several components, these periods of synchronization are often
short lived and are succeeded by waves in the opposite direction.
4. Conclusion
This paper documents the behavior of international capital flows before and after the global
financial crisis with a special focus on Switzerland, a financial center with a small open
economy. Data show that the global financial crisis of 2007-2008 had a permanent effect on
investor behavior across the globe. Indeed, a long-lasting and strong home bias among
investors is observed in many countries since the crisis, as investors have been undertaking
significantly less new foreign investment in the post-crisis period than in the pre-crisis period.
Similarly, since the financial crisis, all countries across the globe have been receiving
significantly less foreign investment than before the crisis period. This phenomenon is
particularly acute in financial centers as well as some advanced economies. In particular,
capital inflows to and outflows from financial centers registered a disproportionately sharp
drop with the onset of the crisis and did not rebound afterward.
A closer examination of the Swiss data for capital inflows and outflows reveals that since
2009:Q2, gross capital inflows to and outflows from Switzerland have been substantially
lower and have exhibited significantly less volatility. By contrast, net capital flows have
become much more volatile since the crisis, suggesting a decoupling of capital inflows and
outflows such that they no longer cancel each other out. Thus, the historical positive
correlation between inflows to and outflows from advanced economies has decreased for
Switzerland with the onset of the financial crisis.
These findings are confirmed in a statistical analysis in which capital flow waves are
identified. During the run-up to the financial crisis, private capital inflows often registered
surges, but since 2008:Q2, they have largely been within the normal range. Similarly, during
the run-up to the crisis, private capital outflows from Switzerland frequently registered flights,
but since 2008:Q2, they have largely been within the normal range. By contrast, net private
capital flows exhibit frequent abnormal levels, both above and below the normal range.
Furthermore, there was a high degree of synchronization of capital flow waves in different
(sub)components of capital flows before and during the financial crisis. However, extreme
movements of private capital flows are largely driven by extreme movements of bank lending
flows during the sample period. In other words, capital flow waves in bank lending are
identified to be the underlying cause of the extreme movements of private capital flows in
general.
The analysis also shows that some of the notable events that increased the uncertainty and
volatility of global financial markets were coincident with capital flow waves to and from
Switzerland. In particular, two abnormally low observations of net private capital flows were
coincident with the euro area sovereign debt crisis in 2010:Q2 and the extended bailout of
Greece in conjunction the US debt-ceiling crisis in 2011:Q3. By contrast, the collapse of
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